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Business Tax Tips
Accounting & Taxes
Date last modified:
Accounting & Taxes
Business Accounting & Taxes
Date last modified:
Reporting all income is the first priority. As a business owner, you must record every dollar of revenue you take in. The best paper trail is made up of daily sales tapes, paid invoices, charge card slips, etc. Deposit all revenue in full. If you need cash to pay for certain purchases, it is better to write a check for cash and get it from the bank. If you are depositing non-revenue monies – loans, refunds, etc., make a notation in the records. Even better would be to photocopy the deposit. In an audit, IRS assumes all deposits are business revenue, until proven otherwise.
Accurately tracking expenses is the best audit protection. The IRS is conducting more audits and examinations of taxpayers’ returns. One of the hottest targets is Schedule C filers – Business Income and Expense for Sole Proprietorships, but partnerships and corporations are at risk for audits, too. An unfavorable audit can be costly. We advise you have bookkeeping and recordkeeping systems in place – and use them!
When paying bills, note on each invoice the date paid, how paid (check number, debit, credit or cash) and amount paid. Arrange with your bank to receive copies of cancelled checks. Many people love online banking because of its ease but be sure to print a monthly statement for each business account. After a short period, these statements won’t be available online. The same applies for business credit card statements. Keep copies of all statements, invoices and other bills applying to the business for at least 6-7 years.
It is impossible for us to emphasize how important recordkeeping is to your business success. We assist many businesses with their ongoing bookkeeping. Even if you are never audited, good records are a tool to use to grow and expand your business.
Business Assets are depreciated over a period of time determined by the IRS. When you purchase assets for the business, those records should be kept as long as you own the asset, whether it is equipment, furniture, vehicles, etc. An asset is broadly considered something that has a useful life of longer than one year.
The IRS requires all businesses to count and value all inventory on hand at year-end, EVERY YEAR. Many businesses maintain an inventory of product to sell or materials and supplies to make product. Inventory is always valued at the business's cost, not the retail value. The figure is used in the tax calculations. Maintain proof of inventory with your annual tax records.
All businesses in Oregon, even home-based businesses, are subject to personal property taxes on certain assets owned or certain property leased by the business. Personal property taxes are assessed and collected by each county in Oregon. Business personal property is everything except for real property (land and buildings) and inventory. Business personal property that must be reported includes leased or rented equipment, floating property, non-inventory supplies, furniture, owned equipment, professional libraries, art, etc.
A personal property return must be completed every year even if the business is exempt from the tax. Businesses complete a form listing assets and other personal property, date of purchase and cost. The form is due by March 1; tax assessments are sent in the fall and due by November 15. The taxpayer must file an appeal with the county Board of Property Tax Appeals to dispute the assessed tax.
If you are not aware of this tax or your status, please contact your local county Assessor’s office or our office. We understand counties are stepping up enforcement. Penalties for non or late filing can be as much as 50% of the tax due.
If you conduct your business from your home, be sure the space is totally devoted to the business. Is your home office is also the guest room for visitors or is it in the family room where everyone gathers in the evening? Then you cannot take a home office deduction. If you have a legitimate home office, save all records and bills relating to the deductions you take.
A mileage log is an important business record, if you drive a vehicle for business purposes With the mileage deduction over fifty cents per mile, the IRS and Oregon Department of Revenue are scrutinizing mileage claims and asking for documentation. If audited, you will need to produce all requested records. If you don’t have them, you will be expected to get replacement copies of bills and statements or risk having the deduction denied.
Make no mistake…employees are vital to businesses but they are also expensive. Employers must withhold some taxes from paychecks and send those taxes to the IRS and/or the State every month or quarter, depending on potential tax liability. Certain payroll taxes are paid by the employer which can add another 15-20% cost on top of the gross wage. You can pay quarterly federal and state payroll taxes electronically. Ask us about the details of the Electronic Federal Tax Payment System program and Oregon's Electronic Payment system. Employers must have worker’s compensation insurance coverage. Many employers choose to offer benefits, at their cost, to attract and keep good employees.
Consider signing up with a payroll service to avoid costly mistakes. A payroll service will process paychecks, keep track of tax withholdings, prepare required reports and generate W-2s. Many payroll services can help employers manage a benefits package. An alternative is to contract with an employment service. The employer writes a single check to the service for wages, taxes and fees.
There are specific rules about the role of an independent contractor. Why not hire "independent contractors" and not worry about taxes? Doing so could cost an employer even more. In Oregon, a contractor must demonstrate he/she is in business, is free from direction and control, sets own hours, sets own price for contracted services, files his/her own taxes as a self-employed person, supplies his/her own liability insurance (ask for proof when bringing on a contractor), etc.
If you expect a worker to be on the job specific hours, do the work as directed by you, use tools, materials and supplies supplied by you, etc. – you have an employer/employee relationship. Employees who think they have been misclassified may complain to their state’s labor department. They can also file a special form with the IRS, paying only half of the Social Security and Medicare taxes due on their salary. Guess who the IRS contacts to pay the other half, plus interest and penalties?Sole Proprietors can deduct 100% of health insurance premiums as an adjustment to gross income on their taxes if the policy is in the self-employed person's name and he/she is not eligible for coverage under a spouse's plan or a former employer's plan. Business owners on Medicare can deduct the Part B premium as an adjustment to income. Sole Proprietors may also qualify to take advantage of Section 105 Health Plans. Contact Bill for more information.
Many businesses thank good customers, employees and vendors with gifts. To avoid tax problems, gifts must be below certain values. Gifts to employees must not be cash or gift cards, and be of "de minimus" value to avoid becoming taxable income. Higher amounts may not be fully deductible. Some gifts, such as tickets to sporting events, plays, etc. may be taken as entertainment expense (50% deduction). Wrapping and shipping a gift is considered an "incidental expense" and is not counted towards the value of the gift.
Entrepreneurs may or may not be employees of their company, so how does the boss get paid? If your business is an S-Corp and you "perform services" for the business, you are an employee (or should be!). The IRS exams S-Corp returns to assure that shareholders receive "reasonable" compensation for the work they do. S-Corp shareholders/employees receive a regular paycheck and a W-2 at the end of the year. All shareholders will also receive a K-1 reporting their share of the corporate profit or loss.
If your business is a Partnership, Sole Proprietorship or a single-member LLC, then you are not and cannot be an employee. You are entitled to a "paycheck" but it is called a draw and is not considered an expense of the business.
Partners receive a K-1 from the partnership that reports the person’s share of the net income (or loss). Information from the K-1 is then reported on the taxpayers form 1040. Partners are responsible for paying self-employment tax on their share of the income. The income amount may require the partner to pay quarterly estimates.
Sole proprietors are taxed on the net income produced by the business. No W-2 or K-1 is issued reporting this figure. It is calculated from the business accounting records.
Business owners must plan for their own retirement. Ask Bill about setting up a SEP -- Simplified Employee Pension or a SIMPLE IRA. Rules govern whether you have to cover your employees if you set up an retirement plan for yourself.